Defense Sequester Not Hurting Contractors As Industry Claims

A survey of research published in May from the Mercatus Center gave a detailed report on why cutting defense spending isn’t nearly as bad for the economy as the defense industry wants everyone to believe. The good folks at Mercatus were nice enough to create a short summary for anyone not wanting to read the full report.

A Dollar Increase In Federal Defense Spending Results

The existing studies found that a dollar increase in federal defense spending results in a less-than-a-dollar increase in GDP when the spending increase is deficit financed. Combining this with a tax multiplier that is negative and greater than one, the authors estimate that over five years each $1 in federal defense-spending cuts will increase private spending by roughly $1.30.

For the most part, contractors are preparing to release good second-quarter results, industry sources tell Morning D. And this’ll put them in the odd situation of being on the defensive about their good news: They’ll have to explain to investors why sequestration isn’t having a major impact on their sales, especially since several contractors said last year there would be disastrous consequences if the automatic cuts weren’t averted. We expect to hear CEOs describe sequestration as a slow-moving problem, one that’ll have a bigger impact next fiscal year.

The biggest defense contractors have continued to fair quite well despite ongoing concerns of sequester cuts. Their revenues and profits have continued to rise. As we’ve seen recently the Pentagon spending doesn’t seem to be slowing, and even when cuts are attempted, the contractors fight back with lobbyists to protect their revenue stream. Sequestration may eventually take a bite out of the U.S. defense budget, but it hasn’t seemed to do so just yet. If contractors’ revenues start to shrink due to cuts at some point, that is when we’ll have to begin to assess the effects on the broader economy.